Intel profits meet Street expectations; 2006 capex reduced again

October 18, 2006 – Intel Corp. said its 3Q06 results came in at the higher end of guidance, and slightly above Wall Street’s lukewarm expectations. Profits dipped 35% sequentially to $1.3 billion, on 12% lower sales of $8.7 billion. Year-on-year, sales were up 9%, with profits increasing 47%. But citing “greater equipment reuse, productivity improvements, and small timing changes,” the company has once again cut its 2006 capital expenditures outlook, to $5.7-$5.9 billion — down from an outlook of $6.2 billion in the previous quarter, and $6.8 billion at the start of the year.

Reductions to 2006 capex this late in the year have minimal impact on bookings, noted Mehdi Hosseini, analyst with FBR Research, in a research note. “Similar to 20% increase in Samsung’s CY06 cap-ex, Intel’s cap-ex cut back, in our view, is backward looking,” he said. He forecasts Intel’s 2007 capex will be about $5.5 billion, or 14% of sales, slightly higher than in recent years but helped by the release of Microsoft’s Vista OS and a ramp of 45nm capacity.

Hosseini said the most important leading indicator to watch will be at a macro level — “a good holiday sale-through of ICs, plus inventory stocking in 1Q07 for new product cycles (i.e. Vista),” which could accelerate chip unit growth in early 2007, raise fab utilization levels, and spur more equipment bookings, possibly as early as 1Q07.

President/CEO Paul Otellini pointed to record shipments for mobile and server processors during 3Q, as well as “strong manufacturing execution,” i.e. a perceived crossover point to 65nm from 90nm manufacturing. Total microprocessor units were higher (though ASPs were lower), as were chipsets and motherboard units. Flash memory units dipped during the quarter. Investment gains, divestiture gains (i.e., the sale of Micron shares), and restructuring charges increased net EPS by 1.5 cents. Higher microprocessor revenues were offset by a $100 million write-off of older processor inventory.

Looking to 4Q projections, Intel expects sales to pick up again, to a range of $9.1-$9.7 billion, with gross margins ~50%.


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